Question

What are some of the economic roles that government may play?

Answer 1

The world economies were converted from the classical Laissez Faire policy to the modern Keynesian role of government. In modern economies the role of government is not limited to the protection of life and property of the people. Now the government has indispensable and unlimited role to play. The following are some special functions that have to be performed by the government.

1. Provision of public goods.

In a market economy the public goods are not supplied by the private sector. Since there is no rivalry in consumption, the exclusion for those who are not paying it cannot be applied. Since these goods are collectively consumed, the share that goes to each individual cannot be measured. In such situation the private sector is unwilling to invest in such sectors. It is the duty of the government to provide such goods.

2. Providing infrastructure.

It is the duty of the government to provide infrastructure facilities which enlarge output level and efficiency in production. The government has to undertake investment in transportation, power generation, communication, banking, education and health facilities. The investment in such sectors is high as such the government only can finance these activities.

3. Maintaining growth and stability.

Market economies are subjected to wide fluctuations in economic activities. Such fluctuation hampers the longrun growth of the economy. The government has to undertake fiscal and monetary measure to stabilize the economy in view of promoting economic growth.

4. Providing equity.

The market economy distributes income unequally. As the economy grows there will be wide disparity between the rich and poor. This inequality can be reduced by the government through taxation, public expenditure and social security measures. Thus the government can maintain a fair and just distribution of income and wealth among the citizens.

5. Minimize negative externalities and maximize positive externalities.

Market economies usually create negative externalities. When there is negative externalities the social cost is greater than the private benefit. In such situation the social cost can be reduced by the government by taxing those firms which create undesirable externalities. Again the positive externalities can be enlarged by subsidizing those industries which creates such externalities.

6. Maintaining law and order.

It is only the government duty to maintain law and order so as to safeguard individual rights and freedom.

7. Restricting monopoly and preventing unfair trade practices.

The growth of monopoly causes the concentration of economic power in the hands of a few. The monopoly is a social evil as it is productively and allocatively in efficient. Again in an unregulated market, the firms do unfair trade practiced. Thus the control of monopoly power and prevention of unfair trade practices is the prime role of government in an economy.